Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19

41 Pages Posted: 8 Feb 2021

See all articles by Kurt Mitman

Kurt Mitman

Stockholm University; Centre for Economic Policy Research (CEPR)

Stanislav Rabinovich

University of North Carolina (UNC) at Chapel Hill

Multiple version iconThere are 2 versions of this paper

Abstract

We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.

JEL Classification: J65, E6, H1

Suggested Citation

Mitman, Kurt and Rabinovich, Stanislav, Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19. IZA Discussion Paper No. 14085, Available at SSRN: https://ssrn.com/abstract=3780451

Kurt Mitman (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stanislav Rabinovich

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
18
Abstract Views
46
PlumX Metrics